PRESCIENT TIMING - Why did I become the Top 20 Shareholder of Capitaland Retail China Trust in 2017

By Gabriel Yap

Capitaland Retail China Trust, CRCT has just issued its 2017 Annual Report and I have been listed as one of its Top 20 Shareholder.

This is part of the Prescient Timing series of articles (others as attached below) where I share with the general public and students of my REITS investment class (we have been teaching since 2010 on a quarterly basis and the next class is on Sat 2 Jun 2018) the reasons, circumstances of a REIT pick at the right price for a substantial stake. It is part of my philosophy that patience is an important element of REITS investing as you should wait till all the circumstances are right before making multi-million dollar purchases.

https://gcpglobalsg.wixsite.com/gcpglobal/blogs/prescient-timing-the-old-stable-is-still-better-for-my-investments

https://gcpglobalsg.wixsite.com/gcpglobal/blogs/prescient-timing-when-to-sell-your-reit-shares-the-sabana-saga

1. The Market Presents you with value, but you need to know when to seize it

I first bought back CRCT (after trading out previously at $1.65 and above in the run -up from $1.35 to $1.65 from Sep 2015 to 2016) in Dec 2016 at $1.33 - $1.35.

The market presented the chance as this was only the 5th time in the past 5 years that CRCT had traded at below $1.35. I felt that 2016 was a good year to establish a major position in CRCT as the operations of its 10 malls in China experienced its worst numbers - DPU dropped for the first time in the past 5 years from 10.6 cents in FY2015 to 10.05 cents in FY2016.

This was confirmed when the results came out in Mar 2017. The best time to buy is when the market punishes the REIT price, but the smart investor should know the REIT quality of assets well enough to know if they are one-off or a recurring problem.

And indeed, when the results came out in Mar 2017, it was another buying opportunity as the REIT price eased from $1.48 to $1.40.

Operationally, I was taking a bet that one of its largest asset, Capitamall Minzhongleyuan in Wuhan, which was adversely affected in the previous 2 years in 2015 and 2016 by the closure of its main road Zhongshan Avenue due to rezoning and road works, would start to recover as the road works completed in Dec 2016.

Also, I was expecting that Capitamall Xinnan, which was acquired in Sep 2016 would have a major impact going into 2017 as the acquisition was financed by cheap bank loans without equity issuance.

To me, the Value of a REIT = Value of its underlying assets +/- Management Competence as we normally teach in class, so timing your purchase with the turnaround of its assets holds the key in getting the REIT price on the cheap.

Hand-in-hand, DPU and DPU growth are probably the most important thing for any REIT investor. A REIT's ability to grow its DPU over time is essential for generating good long-term returns for its unitholders. The per unit information of a REIT is more useful than merely looking at the REIT's overall performance as it takes into account any dilution that may have occurred during the period under study. Also, management can attribute any kind of reasons for underperformance, but for the smart REIT investor, the bottom-line - DPU and DPU growth holds the key to Total Returns in the finality.https://gcpglobalsg.wixsite.com/gcpglobal/blogs/the-ability-to-deliver-dpu-growth-is-the-key-in-sreits-outperformance-in-3q2017

2. Valuing Management Competence is both a Qualitative and Art and it has to be done consistently

At GCP Global, we still manage money and invest in the old fashion way - while we use Artificial Intelligence programs to throw up inconsistencies and Big Data to ensure that we have a comprehensive view of all things REIT, we also assiduously meet up with the REITS CEO and/or Head of Investor Relations on a quarterly basis to be updated on all operational matters over lunch or coffee.

As what we teach our students, if you are well-equipped to ask the correct questions of high quality, you will usually get good quality answers to help you in the investment decision process. This way is also one of the best way to seize up Management Competency is mentioned in textbooks, but hardly taught in real-life experience.

With respect to CRCT, another good measure of the Management Competence is the ability to grow its NAV per unit from S$1.31 in 2012 to S$1.60 in 2017. This is actually a big achievement for CRCT as along the way CRCT has had to grapple with problems not only with Capitamall Minzhongleyuan, but also malls like Grand Canyon and Wuhu.

Improvements in NAV are very important indicators of performance for investors as they reflect in total, whether management has bought the asset on the cheap or whether management has been sharp and got a good price for the asset in a sale.

Knowing the ex-CEO, Mr Tony Tan (who is now the CEO at Capitaland Mall Trust), ex-IR, Ms Leng Tong Yen and present IR Ms Delphine Sze, well has certainly being a big plus as both persons embodied the hard working culture of a REIT management that investors look out for.

3. Good acquisitions by REITS can be a lynchpin in the REITS price outperformance

The first question when we met up with CRCT's new CEO, Mr Tan Tze Wooi and new Head of Investor Relations, Ms Delphine Sze was whether its newest acquisition in Dec 2017, Rock Square in Guangzhou actually rocks.

Acquisitions like this hold the lynchpin to DPU growth that could potentially reward unit holders in the future. From my perspective, Rock Square will only start contributing net property income in the first quarter of 2018. Thus, if it rocks, 2018 DPU and DPU growth is likely to come in closer to 11 cents or a 10% improvement. This would be one of the rarest year since CRCT IPO in Dec 1996 when it has close to a double-digit growth at DPU level.

4. Capital Management Skills in an Acquisition

We have always emphasized that how good a REIT is exemplified during an acquisition. While some REITS foolishly resort to issuing PERPS priced close to 7% to make acquisitions, CRCT in effect improved its gearing ratio from 35.4% to 28.4% post-Rock Square.

Secondly, CapitaLand Retail China Trust has a high interest coverage ratio of 5.8 times; In effect, we teach students in class to look out for REITS with good interest coverage ratios of above 5 as it means that the REIT has built up a large enough asset base over the years to increase its debt load for more yield-accretive acquisitions in the future.

Overall, CRCT has been a snail in the past few years as it had experienced low rates of growth after the privatization of Capitamall Malls Asia.

Going forward, I am betting that acquisitions like Xinnan and Rock Square will position CRCT to a good position to grow value for its unitholders at a faster pace. The REIT price should reflect this fundamental changes which smart investors look out for.

For more on which REITS to buy or avoid, when to buy or trade -out, do join our next REITS Quarterly class on Sat 2 Jun 2018. You can sign up at - http://notice.shareinvestor.com/email/20180602_gabrielyap/index.html

 

Gabriel Yap
Mr Gabriel Yap was an eminent stockbroker and investment banker who retired in 2009 to devote himself to philanthropy. He is well-known as the Investment Guru, having been regularly interviewed in the news media like Channel News Asia, Bloomberg TV, CNBC, MediaCorp Radio. Together with the prestigious Fortune Times, Mr Yap hosted the inaugural Asian REITS Pinnacle Awards 2016 in Singapore. Mr Yap was both Chairman of The Future of REITS Forum as well as Chairman of the Fortune Times Asian REITS Pinnacle Awards 2016 Judging Committee comprising of the leading CEOs, deal makers and who’s who in the Asian REIT sector. Mr Yap also chaired the recent Fortune Times REITS Symposium 2017.

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